Source: Going Broke by Degree, Richard Vedder,
American Enterprise Institute for Public Policy Research

Governor Granholm’s “Commission on Higher Education and Economic Growth” begins taking public testimony this month. Having been charged with “doubling the number of Michigan college graduates in the next 10 years,” the commission will also try to ensure that Michigan citizens can get the “skills they need to embrace the jobs of the 21st century.”

The commission will be tempted to call for more spending on higher education. Nevertheless, new research on the economic impact of such spending should give the commission pause.

I have looked carefully at the relationship between economic growth and state spending on universities. I found a strong negative relationship — higher state spending equals lower rates of economic growth.

In my new book, Going Broke By Degree: Why College Costs Too Much, I looked carefully at the relationship between economic growth and state spending on universities. I found a strong negative relationship — higher state spending equals lower rates of economic growth. At the very minimum, the rate of return on state government investments in higher education is very low and very possibly negative at the margin.

Why is that? Due to the presence of state funding, universities are highly inefficient institutions that face few incentives to do things in a less costly manner. By any reasonable measure, higher-education productivity per worker has fallen over the past generation, while it has risen considerably in more competitive areas of the economy. Most increased funds have not gone for instructional items, such as smaller class sizes or tutorial work, but for hiring more staff, general pay hikes, easier faculty schedules, fancier facilities and greater intercollegiate athletics subsidies. The proportion of kids going to college is about the same in states with high government spending on universities as it is in those with more modest support.

The statistical results are confirmed by case studies. For example, compare Michigan with the two other largest Midwestern industrial states, Illinois and Ohio. Of the three states in fiscal 1980, Michigan spent the largest proportion of its personal income on state universities (one-third more than Illinois, for example). Over the next two decades, Michigan dramatically increased its already above-average commitment to universities, so that it had the sixth-highest proportion in the nation by 2000. In 2000, Michigan was spending 2.34 percent of its personal income on state government support for higher education, nearly double Illinois’s 1.26 percent and well above Ohio’s 1.58 percent.

Did Michigan’s higher investment pay off in greater economic growth? No. Illinois’s advantage in per-capita income compared with Michigan actually doubled (to over 10 percent) from the late 1970s to 2002, meaning that “low-spending” Illinois far outdistanced Michigan. In fact, of the three states, Michigan had the biggest spending commitment, but lowest growth, while Illinois had the smallest spending commitment, but the highest growth.

These findings are at odds with a recent study performed by SRI International consulting firm, which argues that Michigan’s universities have an enormous positive economic impact — for every $1 spent to fund them, they generate $26 in further spending. But the SRI study is deeply flawed. It assumes, for example, that the extra earnings that college graduates generate compared with their high school-educated counterparts are entirely the result of their university training — not considering that, on average, university students may well be more intelligent, motivated and ambitious than less-educated members of society for reasons unrelated to their university training.

If more government spending on higher education will not improve economic growth, should Michigan actually reduce its higher education budget? There is a strong case for it. Any state spending that remains should employ a more competitive approach, such as issuing vouchers to high school and college students, so that they are able to shop around for a better deal.

A voucher approach could be tailored to solve other problems. Vouchers could be ended for students who perform poorly in their academics or behave inappropriately (for example, participating in riots after a big game). The problem of college access for poorer students could be addressed by making vouchers progressive — giving more money to kids from low-income homes and less to the wealthy students.

The idea of shifting control over funding away from universities is actually being debated. Colorado recently enacted a voucher law for higher education. Some states are even thinking of privatizing state institutions.

If improving higher education for purposes of economic growth is really the goal of Michigan’s commission, the evidence shows that simply hiking expenditures is not the answer. A more prudent approach may be to cut spending and make higher education more competitive.

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Richard Vedder is Distinguished Professor of Economics at Ohio University and a research adviser to the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation with the Mackinac Center are cited.

ISSN: 1093-2240,
SKU: V2004-27

Summary

The governor has appointed a “Commission on Higher Education and Economic Growth,” yet research suggests that more state spending on higher education will not improve Michigan’s economy. A better approach would involve fewer direct subsidies to colleges and universities and more competition among them.